Cash Handy for Assets Reduced for Sale

A handful of investors, over the past several weeks, have grabbed their wallets and gone shopping for retail real estate in the U.S., ready to pump billions of dollars into the parched market … if the price is right.

Last Friday, a pair of Dutch financial firms, United Investment Company and SNS REAAL, formed a $1 billion fund to finance the development of small-scale retail projects in the U.S. with tenants such as Starbucks, banks and gas stations. A week ago, Beverly Hills, Calif.-based Canyon-Johnson Urban Fund closed the $1 billion Canyon-Johnson Urban Fund II, to invest in new urban developments in 40 metro markets across the United States.

In addition, as recently as Apr. 1, financial services provider TIAA-CREF Asset Management launched U.S. Real Estate Fund I, LP, which will seek at least $300 million in commitments for high-quality commercial real estate opportunities in the domestic arena and New York City-based private equity firm the Blackstone Group closed a $10.9 billion fund focused on global investments called Blackstone Real Estate Partners VI.

With commercial real estate owners in the U.S. struggling to hold on to their properties in the midst of a credit crunch, cash-flush private equity players, pension funds and foreign firms seem poised to take over the market. It is an opportune time for those with ready cash and a long-term strategy to acquire assets on the cheap, notes David J. Lynn, managing director of research and strategy with ING Clarion Partners, a New York-based U.S. investment management arm of ING Real Estate.

"It's a good time to buy," says Lynn. "A lot of people recognize that it won't last forever, so they are taking advantage of it."

In just the past month these private and foreign investors have established pools of cash for the purpose of snapping up high-quality assets at reduced prices. The funds' creation comes at a point when many domestic players have either shied away from commercial real estate or been relegated to the sidelines as a result of the increasing difficulty in securing financing.

In the fourth quarter of 2007, construction loan delinquencies in the U.S. commercial sector reached 2.2 percent, according to Foresight Analytics, LLC, an Oakland, Calif.-based provider of real estate market consulting services. The number represents an increase of 120 basis points from the fourth quarter of 2006, when delinquencies in the commercial sector stood at just 1 percent.

"The ability for developers to obtain financing is so difficult, this is a real opportunity for investment companies that have dry powder," says David M. Jacobstein, chief advisor to the real estate group at Deloitte, a New York-based professional services firm. "And if a private equity fund is not happy with the quality of the developer, they can partner with a REIT and take over the entire project."

U.S. commercial real estate property fundamentals are still stable enough to attract foreign money, both in the form of direct acquisitions and funds given over for investment to U.S.-based asset managers, says Jacobstein. Over the past few years, asset management firms would have used those monies to purchase real estate companies wholesale through leveraged buyouts. However, with credit no longer available, they are forced to concentrate on pools of assets.

Meanwhile, as the year progresses, those owners who have held off on selling their properties might be forced to do so at a discount, says Suzanne Mulvee, senior real estate economist with Property & Portfolio Research, a Boston-based independent real estate research and portfolio strategy firm. She noted that time is running out for those who can't secure refinancing loans.

"It's not that we think there will be a flood of distressed properties, but we think that the wide disparity between buyers and sellers will start to narrow and the concessions will be made mostly by the sellers," Mulvee says. "Given the lack of volume, those sellers that have to sell will have to make concessions on the price."